September 23, 2008

Unless you've had your head in sand for the last couple of weeks, you'll be aware that Betfair announced that from yesterday, they would begin to levy a new charge on "successful" accounts. This new "Premium Charge" will, according to their statements, affect 0.5% of the userbase. For your reference, here are those details I'm sure you are overly-familiar with by now, even if you are presently unaffected, pay attention, because you might be in the future,

"Customers will only be considered for the Premium Charge if, over the previous 60 weeks, they satisfy the following criteria:

Account is in profit;

Total charges paid (commission generated,
Transaction, Data Request and Premium
Charges) are less than 20% of gross profits; and

Bet in more than 250 markets.

There are two further conditions that are also calculated:

Any single win that constitutes more than 50% of gross profits over the previous 60 weeks will be excluded from the calculation; and

Each customer will have a 60 week allowance of £1,000 against the Premium Charge i.e. the customer will not pay the first £1,000 of charges.

Each week the customers who meet all the conditions set out above will be charged the lesser of:

The difference between 20% of the previous week’s gross profits and the total charges paid during the week; and

The difference between 20% of the previous 60 weeks’ gross profits and the total charges paid during that period.

Our pricing strategy is changing as from the 22nd of September. The first Premium Charges will be collected the following week - week commencing 29th September."

A further detail neglected in much of the forum discussion is that on the date of the 29th September, all accounts that have a profit and have traded 250 markets in the last 60 weeks are assumed to have been operating at a level equal to paying 20% of gross profits to Betfair. If in the first week, the commission you generate falls short of 20% of gross profits, then this will be taxed the following week. Apparently this doesn't constitute 'back-dating' in the PR world.

Another under publicised fact about this charge is that the 20% figure is now the MINIMUM you will pay Betfair in commission on gross profit. That's right, it's now not about trying to find ways to get under 20%, but how to make sure you are paying the minimum 20% rather than more!

Betfair are very keen to point out that not many people are affected by this on a weekly basis. All this means is that if you are not charged, you are already paying above the 20% mark.. Do you feel better about things now you know this?

I've taken quite some time to put this post together, there's been a lot of messages asking if I'm affected, where's my blog post on it, what's going on?? I had to give time for the dust to settle on this one, it's such a serious topic and a complex one too that it took me a while to calm down enough to begin to understand it.

Yes, I am affected by it. Due to the up and down nature of how I've been betting and slowly altering strategies, it is difficult to tell just how much this would affect me. (If you think you might be affected, ask Betfair for a spreadsheet breakdown of your last 60 weeks.) On current form I believe this will cost me up to 6 figures per year (my last 5 weeks would have cost me an extra £29k !).

This is a good example of where this calculation falls down and is far too unspecific in who it targets. Lets get into Betfair's reasoning behind the charge and then some definitions that should show why it is so unspecifically greedy.

On Betfair we have a variety of winners, those that win consistently, those that work out a profit on balance. Over time, winners remove the excess profits they make and carry on using the site. This money taken out, is never recycled on the site for other people to win, so it leaks away into winners' bank accounts and must be replaced somehow. This, according to Betfair, costs a lot of money in advertising to attract the required new blood, more in fact, than the amount they are gaining from these winning accounts in commission.

I don't think this can be argued against, this money does get extracted at a fast rate by some users. In my conversations with other winners we have often wondered where the money actually comes from. Betfair believe it is their costly advertising that does the leg work in attracting this money, this must be true to some extent. There's been much conjecture over time about whether it is winners or losers that are the life blood of the exchange, this move settles the argument conclusively in favour of losers.

But what of these costs? As a chargee, my first (over?) reaction is to tell them to stop spending so much. Surely this is not just about advertising, it's overheads and it's spending. The company has expanded at an incredible rate, 1200+ employees, a very nice HQ, innovative technological investments... and also numerous additional mini-sites that few surely find useful. They have their fingers in many pies. "Pies" which are increasingly focused on extracting money directly from customers, rather than through commission on their exchange, sounds a bit like a bookies doesn't it? See the newly unveiled Betfair Arcade for example - this is a shameful expansion into online FOBTs (Fixed Odds Betting Terminals), designed to take money from the less clued up gambler and those with problems, completely and utterly against the ideals of a betting exchange.

This sort of activity I guess is predictable. As a company grows, the original ethos is lost as costs grow and profits become the sole focus, as do employee bonuses.. There is an undoubtedly faceless feel to Betfair these days, buried deep in their midst (bloated underbelly?) are boards, think tanks and departments focused on how to get more money from the people using their site. As a business, you can't argue with their aim to make money, as long as it is done fairly.

"Fair" is something this new charge is NOT. It affects everyone, including those that have been told they would not have been charged in the last 60 weeks. I think it may be helpful here to define 3 key types of Betfair player,

The botter, these people program software to bet on their behalf automatically, through the day, on various markets. Because of the automated nature of their betting, they can do so with sufficient speed and efficiency to vastly reduce the chances of not winning. Dependent on strategy, some bots will win on virtually every market they play.

The trader, we'll classify these as humans who like to buy and sell (back and lay) more than once (usually in-running), similar to how you might on a stock exchange. As a result they often end markets with p/l's showing a win on both players or often a loss on both players. There are more varieties of styles within this classification than the others, some traders will take more risk than others - holding positions for longer, basing their actions on the event they are trading. Other traders will scalp, take much smaller risks, get in and out very fast and base decisions upon the market alone - arguably they are more consistent winners.

The punter, he's an old fashioned gambler who bases his decisions on value or opinion before the event begins and runs it to conclusion.

All of these players are hit by the new charge. But how can this be right? Clearly some people can afford this new charge more than others. "Afford" in this case is related to risk, value and the regularity of that user's profits.

Users who rarely lose, with winning books on any outcome can afford to pay more than others. (I'm not in favour of this charge, but I'm being realisitc.) Particularly botters, who use automated software and spend little time themselves actually placing the bets. If you switch on a program and sit back while the funds come in, then personally I think 20% is probably cheap, considering previously you were paying 2% and no tax. There is very little risk in what these users do, and "risk" I believe is the valuable commodity Betfair want to encourage with this charge. See the Betfair forum for evidence of one or two botters not bothered by the increased payment.

The next group with lowered risk are the traders. A highly contentious group, with a myriad of styles and levels of risk. Much of the debate when this charge was announced was centered around this group of users and what their worth to the site is. In fact this has always been passionately argued over, even before this charge, I could perhaps write a book on the subject.

It's the variety of trading techniques which make this group difficult to charge accurately or gauge worth to the site. Few people trade the same, and few trade consistently. Some take risks and build large positions, others are buying and selling very quickly. It seems unfeasible to charge everyone the same, when some win very often, and others provide as much risk as any gambler does. The most important distinction here is that these are human, manual traders, placing bets. Humans make mistakes, errors of judgement or plain accidents, no one can win 100% of the time and this must be taken into consideration. It is impossible to see how this group could be charged as much as an automated program.

The unfairness of the charge is most easily demonstrated by looking at the plight of our gamblers. If it was unfair to treat all traders the same, it is even more so to expose out-n-out gamblers to the chance of being charged. The vast majority of people that simply punt, will already be paying above the 20% almost all the time. This is fine, the edge that they seek in their bets will have been preserved (dependant on their handicapping skills).

But what happens when there is a week where every bet wins? This is quite possible, infact it's probably a certainty to happen one week - given enough weeks. The commission generated on gross profits they paid during this week dropped to their commission rate divided by 2, and their profits for the week took the average commission on gross profits over the previous 60 weeks well below 20% (quite a mouth-full). They will now be charged the difference.

The edge on all of these bets has been decimated! A year's hard work of edge preservation has been destroyed in (what used to be called) a lucky week. There is no way these people should be charged.

"Commission generated = (Commission + Implied Commission) ÷ 2" is the calculation used to reach the figure that will need to be made up to 20%. "Implied Commission" is the commission that would have been paid on a losing bet (by the person / people who won). This I believe is an average figure taken from the rest of the market participant's commission rates. According to Betfair this is usually between 2.5% and 3%, but we have no way of knowing the precise figure at the end of a market.

Dividing by 2 really can mess you over though. In the case of our punter who has a lucky week (with no implied commission), his commission generated is half the amount of commission he's already paid. I had one such week displayed on my spreadsheet, my commission generated was actually 1.4% of my gross profits!

This whole thing is calculated terribly and over simplistically. There are running jokes about the ridiculous small print on Betfair, but this is not a calculation they should have attempted to simplify. What is needed is a actuarial style calculation based on what we can each "afford" to pay. And this will vary as our method of betting changes, few people bet the same all the time. This can't be worked out over the course of one week either, I suggest at least a month.

All of this discussion is nullified now we are into the charging period. The charge appears to be going ahead, despite being ill conceived, rushed into effect and without preparation of the reporting features we are entitled to have, so we can see how much we are being charged. To some, it seemed heavy odds against getting this far, now we are here, it looks as if there is no going back.

Talking of odds, this is a huge gamble by Betfair. A punt of crazy proportions, perhaps their whole business... certainly their exchange image, by the way, this bet has already been settled and paid out - they lost!

For their sakes I hope they have done their own calculations right. This is effectively "all in" by Betfair, gambling that masses won't leave and liquidity will be intact. As a customer, it shows incredible arrogance. They are abusing their dominant status in the Betting Exchange market. They claim there is no such market, instead aligning themselves with the much larger Betting Market as a whole. Convenient, but not their real competition.

A betting exchange is something vastly different to what bookies offer, populated by punters of a different mentality those on the street. Their direct competition is other exchanges, not bookmakers. Exchanges thrive on liquidity, without it - no punters, and with no punters - no liquidity. That is a strangle hold over their competition and they know it. The newly published Betfair Arcade and comparisons with mainstream bookies demonstrates Betfair's intended direction perfectly.

Can they get away with it? Will liquidity cross the chicken and egg style divide and disappear to other sites? It's tough to know, but the signs are that there is massive discontent among a very large portion of the users who feel abused by this charge. Most of these people are traders (and many punters too), who defend their right to buy and sell passionately. This is, and always was, one of the beauties of the betting exchange concept. Many in this group can afford the charge, but most can't. They are winning and losing types, they do provide meaningful liquidity and I believe it's a mistake to risk losing a proportion of this group.

Their closest rival is Betdaq. Previously the liquidity there was a mere 5% or less of Betfair's, but it is improving, and quickly. Rumours were that 800 new accounts opened the day after the charge was announced.

Their commission structure remains similar to the way Betfair used to operate, and if you open a new account now, citing the charge at Betfair, you'll be given the 2% rate until the new year. This is a good effort from Betdaq, but they'll need to show a lot more effort, and quickly for things to tip.

There is momentum for change at the moment, but with every passing day it dissipates. Luckily there are some key events ahead which might provide much larger tipping points. The first of these is when the charge is first levied next week. Expect the amounts to be published on the Betfair forum, along with much annoyance.

The second of these and potentially the largest, is the launch of 3rd party trading applications pointing at Betdaq.

The problem with gaining liquidity and market share for a small exchange has always been the effort required of it's users to post bets with the prospect of not getting matched all day. But if this never occurs, the liquidity will never grow. It costs time and effort to achieve, and gamblers are not known for their patience. The launch of one click ladder interfaces for Betdaq will remove the cost in time and effort required to do this.

I fully expect this to provide an massive boost to in running sports on Betdaq. It will be easy to open up applications accessing both Betfair and Betdaq and bet into both at the same time. Before long, we will have a choice. The BetAngel team are working on their application as we speak.

Indeed it becomes very apparent that it's this 'liquidity divide' that Betfair believes provides the protection for their gamble. If the divide is made easy to cross, then they are vulnerable to a fair marketplace and market forces. In a fair market, I very much doubt one company charging 20% against their nearest competitor charging 2% would survive such market forces.

Will I continue to use Betfair? In the immediate future yes, and probably longer term too, but if there is a switch, then less so. I don't think it's wise to overreact and leave immediately (we know what happens to over-reactions). I can afford this charge, I don't enjoy the prospect of paying 2-4 times as much money to Betfair, but I will still survive after it.

Saying this, I am not doing much betting at the moment, I'm working on my strategy and figuring out what is the best course of action to minimise this payment. I do take issue when a company arrogantly uses it's position to charge it's customers, the introduction of the Arcade has also left a nasty taste, so I'm loathe to add liquidity to the exchange if I can help it.

It has been suggested that we arbitrage our way out of the charge, not only by other users, but by Betfair themselves! They were banking on that happening in my opinion, perhaps they might even have expected a rise in liquidity. Either way, I find the prospect of arbitrage simply to nullify the charge's effects more than a little self defeating. You provide more liquidity and you pay the commission they were going to take anyway, I won't be doing this if I can help it.

My aim is to help provide more liquidity elsewhere, and to wait for the new BetAngel product for Betdaq to arrive before beginning to bet into both exchanges again. I'm sure there will be some teething problems at Betdaq. With the added activity, their site may well suffer to begin with, I think it's wise to expect this. Betfair has also suffered downtime in the past, we all got up and carried on, the same will apply.

I think it's in everyone's interests that we have a fair marketplace with decent competition and choice. If we can achieve this through providing liquidity elsewhere at the same time as Betfair then we will eventually have that choice, the easier this is made, the better for all of us using the exchanges. We have to work together to make things change for the better, simply allowing such market dominance and arrogance to go unaswered is not the way forward.

There may be lessons to be learnt here by all the exchanges however, and that is, the issue facing Betfair's costs could eventually affect them all. The money lost does have to come from somewhere, perhaps the other exchanges may be wiser examining the way their commission structures work ahead of time. Losers and risk takers it would appear, need much more reward for their efforts.